US Growth Guideposts

The key U.S. economic guideposts highlight the divergence between business economic outcomes and household outcomes which is so dividing the national debate in the USA.

From time to time, the weekly ATC emails have reviewed current U.S. economic conditions through the prism of four key indicators:

employment growth;

disposable personal income;

industrial production; and,

business sales.

These are the key measures used traditionally by the National Bureau of Economic Research to judge whether the U.S. economy is in a recession or expansionary phase.

As well as providing an assessment of the U.S. economy, a focus on these measures serves to highlight the importance of having a consistent set of guideposts in an environment in which investors are susceptible to being peppered by a plethora of statistical series often purporting to describe the same aspect of economic activity.

One of the features of the U.S. economic debate is the multiplication of statistics on the same subject. Not content with a monthly employment number from the Bureau of Labor Statistics, for example, there is also a private sector measure of employment growth released a few days ahead of the official statistics to pre-empt the headlines. Several purchasing managers indices also attempt to second guess other official measures of activity.

In an era demanding instant reactions, there is a risk of having too much information to digest.

Against this background, there is some merit in having a consistent set of guideposts to which we can turn periodically to assess the progress of the economy through the cycle. Charts showing movements in the four measures listed above since 1990 are shown at http://www.thebigpicture.com.au/atc/us_econ.pdf.

Having recovered from the 2008 recession, U.S. business sales growth is running at higher rates than have generally prevailed over the past 20 years.

Similarly, although industrial production growth seems to have peaked, the most recent pace of growth has exceeded the average outcomes over the past 20 years.

The U.S. employment growth rate has been trending down for some time. Against this background, the fact that current growth rates are slower than average is actually consistent with the historical pattern. Unfortunately, the loss of jobs in the most recent recession was so severe that relatively weak ongoing employment growth has not been enough to make any substantial inroad into the pool of unutilized labour.

These three indicators, on their own, could easily imply that the U.S. economy is travelling as well as could be expected and that there is only limited cause for disappointment.

Growth in disposable income tilts the balance toward pessimism. It is the one indicator most significantly out of line with its historical track. The peak growth for the current cycle is no stronger than the low end of outcomes in the past 20 years.

This is the point of vulnerability in the current U.S. economic cycle. In part, this series shows the impact of government sector job cutbacks but is itself a reflection of weak demand for private sector services.

An erosion of household spending power is a worrying sign for future production and sales. Not only does it affect how much can be bought; it also affects the mental disposition of consumers and their level of optimism about economic conditions generally.

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